Do you remember a few years back when investing in mortgages managed by solicitors was a common way of getting regular income for many Australians? Mortgage funds, also called a mortgage trust, nowadays have changed structures and are more regulated for consumers' protection, but the basic investment concept is still the same.

As the name suggests, a mortgage fund takes investors' money and uses it to make loans secured by mortgages or buy existing ones. You as an investor then receive the net interest payments on those mortgages, after the Investment Manager deducts fees and expenses in running and operating the Fund. These loans can be secured by mortgages over retail, commercial, construction and development, industrial or residential properties. In return for investing your money, the fund manager promises to pay you a regular income, usually monthly quarterly or half-yearly (called distributions).

Evolution from solicitors' books

The introduction of the Managed Investments Act in 1998 (now Chapter 5C of the Corporations Act 2001,) and the subsequent Financial Services Reform Act 2001 (FSRA) (now Chapter 7 of the Corporations Act 2001) saw greater regulation introduced to the mortgage investment industry. Legal firms which had acted as a conduit between clients with funds to invest and clients with a need to borrow now had to meet additional statutory requirements, such as obtaining an Australian Financial Services License (AFSL), the appointment of Authorised Representatives and additional Product Disclosure Statement requirements. Furthermore, FSRA introduced greater limitations on the ability to provide financial product advice.

Many small solicitor mortgage books were not of significant scale to absorb the costs needed to meet these additional requirements. Accordingly, the new compliance burdens forced many Solicitors to decide between being a mortgage operator or operating a legal practice, with many choosing the latter.

What type of investment can you choose?

Mortgage Funds can be set up in different ways. You can choose:

• Pooled mortgages where all investors share in all the mortgages. You therefore take your share in all the income and spread the risks across all the mortgages that the scheme manages. Low to Medium Risk
• Contributory mortgages where you choose which mortgage(s) you invest in. Your mortgage(s) may pay a different income than other mortgages in the scheme. Your risk depends on the quality of the borrowers to whom you have chosen to lend. Medium Risk

Why invest in mortgages?

Currently thousands of Australians, companies, trusts and self managed superannuation funds have over $25 billion invested in Mortgage Funds. A mortgage fund can provide you with superior investment returns to cash management trusts. Apart from higher returns, mortgage funds give your investment portfolio an extra level of diversification. Given that mortgage funds are not closely correlated with returns from other asset classes, adding a mortgage fund to your investment portfolio can smooth the volatility of your total investment returns.

Rate of return

Investments in private mortgages can consistently earn between 7% and 15%, but remember that investing in a mortgage fund is of course, not entirely without risk, as the value of the underlying investments can fluctuate depending on the quality of the mortgages. Thus, we recommend that you first speak to your financial planner about the level of risk you are comfortable with and individually assess each mortgage fund before you sign anything. However, the rate of return for a mortgage fund compares very favourably with other forms of investments.

Unlike investments in stocks or bonds, mortgage investments are secured by tangible assets that you can 'touch and feel'. Typical mortgages are based on a percentage of the appraised value of the real estate security or the Loan to Value Ratio (LVR). By combining a lower LVR with short loan terms (the length of time of the loan is outstanding) the likelihood of the value of the real estate security dropping below the value of the mortgage is in a normal market considered minimal.

As an example, if you were to invest $100,000 in a mortgage today, with real estate security worth $133,000, in two years time, when the mortgage matures and is repaid the value of the real estate could drop 20% and your initial investment capital should on balance still be protected. Compare that security to a $100,000 investment in a share whose value drops 20% to $80,000 after your purchase it!

Once the borrower receives the mortgage funds, they are required to make regular periodic payments of interest. This provides you as the Investor with regular periodic cash flow.

You choose the real estate mortgage that is right for you...

In conjunction with one of our trusted alliance partners, you and your financial planner can review the details of the borrower and the proposed loan, including investment term, interest rate, and payment terms together with a description of the project or property used as security for the loan before you invest anything. Based on this information, and any additional details required, you make the decision whether you want to invest or not. Minimum investment is $1,000, so you can have all the advantages of being "the bank" without having to fund the entire mortgage.

The types of first and second mortgage investments available can include:

• Residential single and multi purchase and development

• Unit or apartment conversions

• Land acquisition, land servicing and new construction building loans

• Commercial, retail, industrial and other projects.

• There is also the option to invest in a diversified pool of mortgages using the pooled mortgages option

The Pooled Mortgages Option, as the name suggests, pools investors' money to invest in a wide range of first mortgages in Australia, diversified by both sector type and geographic location. The Option currently invests in nearly 400 different mortgages. The initial investment term is for 12 months, and the maximum loan to valuation ratio for mortgages in the Pooled Mortgages Option is 75% (the actual average is 60.0%).

One of the key strengths of the Pooled Mortgages Option, as confirmed over the last 18 months, is the stability of its returns. It has also been recognised as Australian best Mortgage Fund by Money Magazine, by winning the 2010 Best of the Best Award.

Professional Management

In connection with our trusted alliance partner, we will manage all the details of the mortgage loan. We co-ordinate all the legal documentation, monthly mortgage administration and mortgage renewal negotiations. We collect your interest due and pass it on to you, the investor. Fees for this service are paid by the borrower via a management fee which is paid with the borrower's interest.

Our partner is a comprehensive mortgage investment management group, and one of the largest privately held financial services businesses in Australia, with total assets held and under management at 30 June 2008 exceeding $1.5 Billion. They serve over 27,000 customers for both mortgages and investments and have lent over $10 billion dollars to 100,000 customers since inception in 1952.

Advantages to investing in a mortgage fund through Intellichoice

• Higher yielding fixed interest product, offering quality investment portfolio diversification

• Monthly, stable cash distributions or option to automatically reinvest

• Very low capital volatility - an investment directly secured by mortgages over a diversified pool of properties, with security collateral valued at 150%-200% of investment value

• Rated by independent agencies

• No investor redemption freeze - a liquidity structure that has proven it meets our investors' expectations

• Quality asset pool selected and structured from our partner's extensive settlement volumes and designed with superior diversification

• Enhanced collateral protection (income and capital) through a dedicated cash Reserve

• Higher investor rates among its asset peers over all time periods

• Long term, successful fund manager with sound business, long term funding, stable profits and a strong balance sheet

• A regular communications program with our investors, providing timely transparency and confidence that they will be regularly kept informed

If you are interested in finding out more about a mortgage fund or other investments and how a financial planner at Intellichoice can help you grow your wealth in a safe way, call 1300 55 10 45 today. We have a wide range of mortgage fund options available in the major capital cities, including Sydney, Melbourne and Brisbane. Minimum investment needed for a mortgage fund is only $1,000.

Compounding is when you reinvest the interest you earn on an investment. Over time, this can be an effective means of accelerating the growth of your money. If you continue to reinvest your interest over a few years, you will be earning interest on your interest on your interest. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off you.

How to make compound interest work for you

1. Save as much as you can for as long as you can

2. Stay invested

3. Don't spend the interest! Compound interest can be earned on both the principal and interest

The basic principles of compound interest

If you were a regular saver who was able to put away $100 a month over a long period of time, how well would you fare? Like a lot of things in life, that would depend on a number of factors, but the following basic principles hold true:

Start investing early

The more time you have, the greater the effect of compound interest. If you were to invest $200 a month from 20 to 29 years of age and then left your investment to grow, you would probably have more money at 60 years of age than someone who chose to invest that same amount per month from 30 to 59 years of age.

What difference does 1% make?

The difference between investing at 7% and 8% over time is huge, so it's important to get the best rate possible!

Growing your savings

If you saved $100 a month for 40 years and your investments compound at 6% a year, you would not have $51,360 as you might expect ($100 x 12 months x 40 years x 106%), but actually $248,552 due to compounding!

When you invest, keep in mind that compounding amplifies the growth of your working money. Just like investing maximises your earning potential, compounding maximises the earning potential of your investments. However, remember that for time and reinvesting make compounding work, so you must keep your hands off the principal and earned interest for this investment strategy to work properly.

For more information about compound interest and other types of investments available, speak to one of the financial planners at Intellichoice today on 1300 55 10 45.

Managed investments or managed funds is an investment tool that pools the funds of individual investors into a single fund and investment decisions are then made by an experienced fund manager on behalf of the individual investors. Depending on the particular managed investment (often called a managed fund), it might invest in shares, property, fixed interest or cash, or a combination of all these assets.

When you invest in a managed investment, you are allocated a number of units based on how much you invest and the current price of each unit. For example, if you invest $10,000 and the unit price at the time is $1, you would own 10,000 units. If the value of the managed fund rises to $2, then you investment will be worth $20,000 ($2 x 10,000 units). If the unit price drops to 90 cents, then your investment would be worth $9,000 (90 cents x 10,000 units).

Managed investments have become popular with investors due to the following reasons:

1. Expert management

Investment managers employ teams of investment analysts and portfolio managers to constantly research investment markets and determine which assets should have the best performance. They will then buy those assets on your behalf and monitor them closely to ensure they perform as expected.

Investment managers also conduct regular reviews to determine which assets should be sold and replaced with assets with more potential.

2. Broad diversification

Diversification minimises the risk of losing capital and the risk of fluctuating investment returns. It is another way of saying 'don't put all your eggs in one basket.'

The problem for most people is that they don't have enough money to spread their investments enough to minimise these risks. That is where managed investments come in. For as little as $2,000 (or even less in some cases), you can access a diversified portfolio which contains hundreds of well-researched investments.

Some managed investments are asset-specific, which means that they only invest in one asset type - shares, property, cash or fixed interest. However, in each case, the managed investment would still diversify. For example, a managed investment specialising in shares will typically invest in a range of shares across many different sectors such as banks, retail, building materials, media and telecommunications.

3. Convenience

Using managed investments will save you time and effort as the investment manager does all the research, buying and selling on your behalf. All your administration issues are taken care of as well - from dealing with brokers and sending you regular reports to providing you with information relevant to your tax return.

4. Performance

The constant research conducted by managed funds, as well as their broad diversification, means that they generally outperform do-it-yourself investors who lack access to expert research and diversification.

The benefits of managed investments include:

• diversification - the opportunity to gain access to a wide range of assets with a relatively small amount of money

• greater buying power - access to assets which would normally be beyond your reach, such as an overseas company or a large shopping centre

• increased liquidity - the flexibility to sell your investment units at any time

• professional management - having full time financial experts looking after your investments. This has the advantage of potentially less risk and greater returns

Which type of managed investment should you invest in?

There are a number of different types of managed investments including:

Cash: invests in highly secure bank and government short-term securities and wholesale money markets. You will receive interest on a regular basis

Fixed interest: invests primarily in bonds issued by governments and corporations. The investment will pay you interest and there is also the possibility of a small amount of capital growth and loss

Property: typically invests in commercial, retail and industrial properties. The value of these managed investments will fluctuate according to market movements, but over time should deliver an increase in value greater than inflation. Income is generally paid on a regular basis

Shares: focuses on shares in Australia and/or internationally. These investments will generally deliver the highest return of all managed funds over the medium to long term, however they also exhibit the highest fluctuations in values in the short term. Income which is paid to you will be tax-effective if it is from Australian shares

Multi-sector: invests in a broad range of asset classes. Typically, some of the money is invested in shares and property, with the balance in cash and fixed interest

Please note that management fees vary from fund to fund and you should compare fund managers' fee structures before deciding where to invest. For more information on managed investments or for professional financial advice in determining the appropriate mix of growth and defensive assets based on your current circumstances, time frame and financial goals, speak to one of the financial planners on 1300 55 10 45.

Purchasing shares gives you part ownership in a company and the right to receive a portion of the profits, commonly referred to as dividends. An added bonus is that dividends can provide you with substantial tax benefits, because they are usually franked – either fully or partially. This means the company has already paid tax on this money – usually to the corporate tax rate of 36%. In some cases, it may be even higher.

Changes in share prices reflect the market value of the company. Fluctuations in the market value of shares will be reflected in the underlying value of your original investment.

Income is paid to you in the form of dividends, representing your share of the company's profits.

An added bonus is that dividends can provide you with substantial tax benefits, because they are usually franked - either fully or partially. This means the company has already paid tax on this money - usually to the corporate tax rate of 36 per cent. In some cases, it may be even higher.

The share market is characterised by volatility, with the value of share prices often fluctuating on a daily basis. However, over time, the impact of the daily movements diminishes.  Although past performance is no indication of future performance, the Australian share market has outperformed most other types of investments in the last 10 years. In the last 5 years alone, the ASX 200 grew by over 150% backed by strong resource and financial services sectors.

The share market can be a high-risk prospect if you speculate. Speculators 'gamble' by attempting to profit from short-term fluctuations in share prices. The risk is substantial because it is extremely difficult to predict the market's movements over the short term.

However, shares can be relatively low risk if you take a longer-term view and invest in well-researched companies that are fundamentally sound. If you are not comfortable entering in to the share market directly, but want to invest in this asset class, a managed investment (where your funds are pooled with those with other investors and invested by specialists) may be a good investment option to start with.

Below are 8 reasons why you should invest in shares

• Capital growth: Over the long term, investing in shares can product significant capital gains through increases in share prices.

• Dividends: Companies pay most of their post-tax profits to their shareholders in the form of dividends

• Ease of buying and selling: Compared to other investments, shares are very portable and can be bought and sold quickly

• Diversifies your investment portfolio: Diversify your investment portfolio by having part of your money in the share market. There are over 1,700 companies listed on the ASX covering a wide range of industries such as materials, financial services, retail, health care and telecommunications. Investing across different sectors can help you reduce your risk. You can buy shares directly or through managed investments or with your superannuation

• Shareholder discounts and entitlements: Some companies, for example, retail, hospitality or entertainment, offer generous discounts to shareholders when they buy goods and services from the companies or their subsidiaries. There are also a number of tax advantages when you invest in shares.

• Control the size of your investment: As the investor, you get the control the size of your stock purchases. You can start your share portfolio from as little as $500.

• Liquidity: Shares can be bought and sold quickly and investments can be turned into cash in about 3 days following the trade day

• Cost effective: There are many online brokers which make trading in the stock market very cost effective.

As with any other investments, we recommend you seek professional financial advice first to ensure this is the best option for you. If you are thinking of investing in shares, speak to one of the financial planners at Intellichoice on 1300 55 10 45. We have access to a range of investment options and will be able to recommend an investment strategy that suits your needs and meets your medium and long-term goals.